Which one of the following statements is correct?
A)If the majority of a firm's new customers become repeat customers then there is a strong argument against extending credit even if the default rate is low.
B)A customer's past payment history reveals little information in relation to his or her future tendency to pay.
C)A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase.
D)The risk of issuing credit is the same for a new customer as it is for an existing customer.
E)The recommended credit policy for new customers is to extend the maximum amount of credit you will ever be willing to offer as an enticement to get their business.

Question

Quizplus · Accepted Answer

Limiting the amount of initial credit purchase for new customers is a suggested policy for offering credit. This helps in reducing the risk of payment defaults and also allows the firm to gauge the creditworthiness of the new customer before extending further credit. A is incorrect as it contradicts the fact that repeat customers are more trustworthy and have a lower default rate. B is also incorrect as past payment history is an important factor in determining future payment behavior. D is incorrect as the risk of default for a new customer is higher than that of an existing customer due to the lack of credit history. E is incorrect as extending the maximum amount of credit to new customers is risky and can lead to higher default rates.

Which One of the Following Statements Is Correct